Higher Dollar and Interest Rates Slowed Consumer Spending

Economists and business are expecting a pickup in consumer consumption by the end of the year, when payment of the ‘aguinaldo’ (year end bonus) and major shopping days, such as Black Friday and Christmas. Photo John Duran, El Financiero

The constant instability of the dollar exchange rate and the increase in interest rates, especially in colones, have slowed the growth of consumer spending so far this year.

The El Financiero reports, “up to the first quarter of 2016, household spending grew steadily, reaching an accumulated year-on-year variation of 5.1%. Since then, it began to slow down to a cumulative variation of 4.2% as of March this year. Meanwhile, government spending has increased in the same period, especially, from the first quarter of 2016.”

The Programa Macroeconómico del Banco Central (Macroeconomic Program of the Central Bank), it was clarified that this (public spending) had a growth of 2.7% during the first semester, slightly higher than the same period the previous year.

Alonso Elizondo, director of the Chamber of Commerce, explained that the reduction in the gap between private and public spending and the slowdown is explained by a reduction in disposable income in households, as a consequence of increases in interest rates, the greater depreciation of the colon with respect to the dollar and the levels of inflation of this year, higher to that of a year ago.

Increases in rate increases began June, after the Central Bank increased the Monetary Policy Rate five times (from 1.75% to 4.50%), leading banks to raise their rates in colones as a measure to restore the premium for investing in that currency and lower the pressure on the exchange rate. Although the measure worked, it had a counterproductive effect on consumer spending.

According to the Consumer Confidence Index of the UCR (University of Costa Rica), published in May, 56.8% of consumers expected increases in the interest rates for loans and 50.8% considered it a bad time to borrow to buy durable goods, such as house and car.

Precisely for that, the sale of new vehicles fell 8% in the first half of the year.

The perception of consumers will affect the growth of credit, especially in dollars and, therefore, of spending.